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U.S. Autos & Auto Parts Initiation 26 June 2019 The Challenge of the Two Clocks Equity Research Americas Research Analyst Research Associate Dan Levy Robert Moon Tel: + (212) 325-4617 Tel: + (212) 325-7112 [email protected] [email protected] DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Table of Contents 3 – Executive Summary / Stock Calls / Comp Table 7 – The Challenge of the Two Clocks 13 – The Challenge of the “Near”: Cycle Risks to the Downside 37 – The Challenge of the “Far”: Electric Vehicles 49 – The Challenge of the “Far”: Autonomous Vehicles 64 – Our Dilemma on Auto Stocks 74 – Company Tear Sheets 88 – Appendix All share prices and price-related data as at 24 June 2019 Dan Levy | 212-325-4617 | [email protected] 2 Executive Summary • The auto industry’s challenge is concurrently balancing two clocks – the ‘near’ and the ‘far.’ Simultaneously balancing cyclical with secular is not easy, requiring different skillsets and resource allocations. This will be THE challenge for the industry over the next several years: • The challenge of the ‘near’ – no-growth industry outlook, with volatility and risk to downside. Requires added focus to manage cycle risk. • The challenge of the ‘far’ – Multi-decade disruptive secular shift ahead for the automotive industry in the push to vehicle electrification and autonomous driving, and we are barely in the first inning. Yet attention and resource allocation required now, to avoid the risk of becoming a dinosaur. • Margin pressures indicate challenge of balancing the near and far. • Our ‘two clocks’ industry view implies continued challenges to auto stocks over the mid- term. Yet with sentiment on auto stocks currently deeply negative, we see near-term opportunity based on valuation and underlying fundamentals: • Outperform: Ford (F), Aptiv (APTV), American Axle (AXL), BorgWarner, (BWA), Dana (DAN), General Motors (GM) • Neutral: Adient (ADNT), Delphi (DLPH), Lear (LEA), Magna (MGA), Veoneer (VNE) • Underperform: Tesla (TSLA) Dan Levy | 212-325-4617 | [email protected] 3 Industry coverage summary Target Upside/ One Liner Ticker Company Name CS Rating Price Downside Textbook case for the “Two Clocks.” Undergoing concurrent redesign of business profitability alongside longer F Ford Motor Company OUTPERFORM $13 31% term reimagining of business. Yet upside ahead for stock amid early signs of improvement, with more to come. Right balance of the “Two Clocks.” One of the best names in our coverage balancing the ‘near’ (healthy profit GM General Motors Company OUTPERFORM $48 30% stream, improving FCF) with the ‘far’ (near or at the front of AV pack, doubling down on EVs) offering a compelling narrative on both fronts. Exposure to the right products and trends give APTV one of the best growth outlooks in the space. This, combined APTV Aptiv PLC OUTPERFORM $90 15% with strong positioning in balancing the ‘two clocks,’ drives our Outperform rating. American Axle & Amid challenged valuation, AXL stock is attractive given a potential 2H19 inflection in datapoints (best earnings delta AXL OUTPERFORM $15 28% Manufacturing Holdings, Inc. in our coverage), and also due to solid and highly underappreciated FCF generation Underappreciated strategy and narrative – differentiated end market diversity, resilient business model, with solid DAN Dana Incorporated OUTPERFORM $22 23% contribution from M&A. One of the best growth profiles in our supplier coverage, with robust backlog supporting solid outgrowth vs. mkt. In BWA BorgWarner Inc. OUTPERFORM $50 20% spite of LT risk for EVs, oppty ahead for BWA, with hybrid serving as a growth driver, and offering arguably the most complete portfolio in EV components relative to other suppliers. Opportunity ahead for operational recovery, and long-term opportunity for growth given a robust order book. Yet DLPH Delphi Technologies Plc NEUTRAL $21 17% we are Neutral on the stock given sluggish top-line in 2020 and as it will take time for operations to fully improve. Narrative shifting amid the pivot from “Lear 1.0” to “Lear 2.0.” Increased focus on tech to improve multiple and drive LEA Lear Corporation NEUTRAL $155 12% growth amid challenged industry, yet risk ahead of margin compression. We see solid FCF generation ahead, which will help to support EPS growth in the face of what we see as limited MGA Magna International Inc. NEUTRAL $55 13% EBIT growth. Yet given our outlook for modest top-line growth and that it may take time for the FCF story to drive a re-rating, we remain on the sidelines for the time being. Stock has struggled amid operational missteps. We believe profits have troughed, with recovery ahead. Yet given ADNT Adient plc NEUTRAL $24 9% long path to recovery with execution risks on top of cycle risks, we prefer to be on the sidelines. Potential to be the best organic revenue growth story amongst parts suppliers, with robust order book driven by VNE Veoneer, Inc. NEUTRAL $18 4% exposure to the high-growth active safety space. Yet with significant resources required to execute VNE’s growth plan, EBIT breakeven not expected before 2023. Tesla is leading in areas that will define the future of carmaking, yet it nevertheless faces risks amid its growth path TSLA Tesla Inc UNDERPERFORM $189 -15% – reflected in our below-consensus estimates. And despite growth ahead, Tesla is more likely to settle as a niche automaker Source: Credit Suisse estimates, FactSet Dan Levy | 212-325-4617 | [email protected] 4 Industry coverage summary – comp sheet U.S. Autos Comp Sheet In USD, except where noted otherwise Last Target Upside / P/E EV/EBITDA Market Cap EPS CAGR FCF Yield Div Name Ticker Rating Price Price (Downside) FY19E FY20E FY19E FY20E (bn) FY19-21E FY19E Yield Ford Motor Company F O $10 $13 31% 7.1x 6.9x 2.3x 2.4x 39,770 6.9% 1.7% 6.0% General Motors Company GM O $37 $48 30% 5.6x 5.8x 3.3x 3.4x 53,075 0.2% 8.8% 4.1% Tesla Inc TSLA U $224 $189 -15% na 39.4x 22.8x 13.0x 38,687 na 0.2% 0.0% OEMs Average (ex TSLA) 30% 6.3x 6.3x 2.8x 2.9x 3.5% 5.3% 5.1% OEMs Median (ex TSLA) 30% 6.3x 6.3x 2.8x 2.9x 3.5% 5.3% 5.1% Adient plc ADNT N $22 $24 9% 13.9x 6.9x 6.7x 5.7x 2,058 -4.5% -11.0% 2.5% American Axle & Manufacturing Holdings, Inc. AXL O $12 $15 28% 4.2x 4.2x 4.1x 4.1x 1,322 -4.9% 25.4% 0.0% Aptiv PLC APTV O $78 $90 15% 15.6x 13.7x 10.5x 9.6x 20,325 7.2% 4.0% 1.1% BorgWarner Inc. BWA O $42 $50 20% 9.9x 9.1x 6.2x 5.8x 8,636 5.0% 6.6% 1.6% Dana Incorporated DAN O $18 $22 23% 5.4x 5.1x 4.4x 4.2x 2,595 9.4% 10.7% 2.2% Delphi Technologies Plc DLPH N $18 $21 17% 5.7x 4.9x 4.8x 4.3x 1,593 -0.5% 0.8% 3.8% Lear Corporation LEA N $138 $155 12% 7.9x 7.0x 4.6x 4.4x 8,717 6.8% 10.5% 2.1% Magna International Inc. MGA N $49 $55 13% 7.8x 7.0x 4.7x 4.6x 15,936 6.2% 11.0% 2.9% Veoneer, Inc. VNE N $17 $18 4% na na na na 1,510 na -36.6% 0.0% Suppliers Average (ex VNE) 17% 8.8x 7.2x 5.7x 5.3x 3.1% 7.2% 2.0% Suppliers Median (ex VNE) 16% 7.8x 6.9x 4.7x 4.5x 5.6% 8.5% 2.1% Sources: Credit Suisse estimates, FactSet Note – Ford and GM EV/EBTIDA valuation excludes finco net debt Dan Levy | 212-325-4617 | [email protected] 5 US Autos & Auto Parts Coverage Overview Links to our initiation reports Thematic deep dives: The Challenge of the "Far": AVs The Challenge of the "Far": EVs Outperform: F: The textbook case for the “Two Clocks” GM: The right balance of the ‘Two Clocks’ APTV: Story of the shifting pies keeps growth robust AXL: Positive data point inflection, strong FCF story DAN: Solid Strategy at an Attractive Price BWA: Robust growth narrative, long-term opportunity in EV world Neutral: DLPH: The path and challenges to profitable growth LEA: Lear 1.0 vs. Lear 2.0 – a pivoting narrative MGA: Free cash flow – the key link in the diverse product strategy ADNT: Recovery ahead, but risks and long timing keep us on the sidelines VNE: Double-digit growth opportunity, but long path to profitability Underperform: TSLA: Tesla vs. VW – the debate that will likely define Tesla for the next 10 years Dan Levy | 212-325-4617 | [email protected] 6 The Challenge of the Two Clocks Dan Levy | 212-325-4617 | [email protected] 7 The auto industry’s challenge – balancing two clocks Simultaneously balancing cyclical with secular is not easy, requiring different skillsets and resource allocations. This will be THE challenge for the industry over the next several years The Near The Far .
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